You can get money out of your house without taking out a second mortgage or a home-equity loan by refinancing. You can take out a new mortgage for more than the existing one and pocket the extra cash.
This sort of financing makes sense if your existing loan is at a higher rate than is currently available. For example if you owe $250,000 on your home and you have a 30-year mortgage at 7% interest. Your payments would be about $1663 a month.
Now assume that you’ve had the mortgage for 10 years so the balance on the loan would be about $214,531. If wanted to get $50,000 dollars for a remodeling project you might be able to do that without substantially changing your monthly payments.
So to continue with this example, lets add the $50,000 to the existing loan balance of $214,531 to get a new mortgage amount of $264,531. Now lets also assume that you’ve found a lender who can give you a 30 year loan at 5.6% APR.
Even with financing the extra %50,000 your monthly payment would be reduced to $1,518.62.
Cash out refinancing is an ideal way to pay off high interest debt like credit cards if you can take advantage of a lower rate. If you can’t refinance at a lower rate, you should think twice about paying off unsecured debt with home equity loans. If your new payments are much higher than your old payments and you can’t meet the new obligations, you could lose your home.
The key to sensible cash out refinancing is the interest rate. The interest rate you pay is determined by a number of factors. Your credit score can either raise or lower the rate. The term of the loan or how long you take to pay it off will also determine the rate. Generally, 30-year loans have a higher rate than 15-year loans.
Adjustable or balloon rates can also be a way to save, especially if you plan on selling your home in the near future.
There are several other factors, besides the new interest rate that you might consider. As with any other loan, be sure to count all the costs before you decide on a lender. The APR doesn’t include costs such as closing costs and other fees such as attorney fees, filing fees, title search, taxes and insurance.
Some lenders also charge points. One point is equal to 1% of the amount of the credit line and the points are paid when you close on the loan. They aren’t added into the interest rate.
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